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Ardent Listener
1st August 2007, 20:00

Italy Considering Gold Sales to Pay Off Debt

By Jon A. Nones
31 Jul 2007 at 05:38 PM GMT-04:00

St. LOUIS (ResourceInvestor.com) -- After hording its gold for years, the Italian parliament Tuesday approved a reserve plan allowing the government to look into using the Bank of Italy's substantial gold reserves to cut the country's huge debt. Such actions could have widespread implications for the gold market in 2008.

The reserve plan, known by its Italian acronym DPEF, was inserted at the last minute by Parliament into the 2008 budget outline, which was previously approved by Minister Romano Prodi's government a month ago.

The plan aims to cut Italy's debt to 103.2% of gross domestic product (GDP) in 2008 from 105.1% of GDP this year - about EUR27 billion ($36.9 billion) - using the central bank's gold and foreign exchange reserves. Italy's debt is the world's third highest in absolute terms.

In 2006, the Bank of Italy's gold reserves amounted to EUR38 billion, up from EUR34 billion in 2005. The central bank's foreign exchanges stood at EUR24 billion last year, unchanged from 2005. Thus, Italy has some 62% of its foreign exchange reserves value in gold at about 2,452 tonnes.

Italy has the fourth largest holding of gold after the U.S., Germany and France, excluding the International Monetary Fund. If the country were to reduce its percentage to a modest 30%, it would have to sell about 1,300 tonnes of gold. At current gold prices, this would come to about EUR22 billion.

Matt Turner, commodities analyst with Virtual Metals, said Italy hasn’t sold any substantial amount of gold in many years, since “possibly the 1970s.”

“It seems real enough, and there's perhaps a long way to go until it’s definite, but I think sales from Italy within the next two years seem pretty likely,” he said.

However, previous attempts by European Union governments to use proceeds from central bank reserve sales have met with resistance.

In February 2006, the Bundesbank affectively blocked the German government’s hopes to sell gold to fund research and development projects.

Yet, the Swiss National Bank announced plans in June to sell 250 tonnes of gold reserves over the next two years. With 42% of its total reserves in gold, the bank intends to lower its gold holdings by 20% to 1,040 tonnes.

Turner previously told RI that some central banks feel gold as a percentage of reserves have gotten too high, with many central banks content with about 15%-20%.

Greece has 80% of its reserves by value in gold, Portugal 79%, Germany 63%, Netherlands 56% and France 56%. If these banks were to reduce their reserves to 30%, Germany would have to sell 1,802 tonnes; France 1,273 tonnes; Switzerland 394 tonnes; Netherlands 311 tonnes and Portugal 235 tonnes.

According to the Central Bank Gold Agreement (CBGA) of 27 September 2004, European central banks within the agreement can only sell up to 500 tonnes per year. Last year, signatories failed to meet the sales quota for the first time since the original agreement in 1999, missing the mark by more than 100 tonnes.

World Gold Council data shows that 355 metric tonnes have been sold as of July 27 with only about two months remaining in the 2006-2007 agreement year.

So far this year, the Bank of Spain, France and the European Central Bank (ECB) have been the main sellers. The Bank of Spain cut its reserves by 108 tonnes from March to May, representing 25% of its total reserves. France sold about 91 tonnes, while the ECB sold a total of 60 tonnes.

However, Germany has announced no sales will take place in 2007 and has yet to decide about 2008, Italy has sold no gold in the life of either agreement, Switzerland and the U.K. have now completed announced sales programs and the U.S. has no immediate plans to sell.

RI calculates reported gold sales of about 335 tonnes. At this point, central banks would have to sell about 20 tonnes per week to make the 500-tonne quota this year, well above the yearly average of about 8 tonnes per week.

In an e-mailed note, Jon Nadler of Kitco.com said increased official sector sales could negatively impact the gold price leading up to the end of the agreement year on September 27.

He said an average of nearly 20 or more tonnes possibly hitting the market for the next eight weeks “may put pressure on prices at a time when traditional seasonal demand has not yet commenced.”

Dennis Gartman, editor of the Gartman Letter, agreed that banks have been selling gold at a “heady pace” in recent weeks.

“That has been sufficient to stop gold from advancing, and so the weekly figures shall have our interest,” he added.

James Moore, metals analyst for TheBullionDesk.com, noted that gold had worked its way above the 100-day moving average of $665.80, but warns of possible weakness in the near term.

With “Central Bank sales still overhanging the market and the summer months generally leading to slow physical demand, rallies will still struggle for traction and may keep gold in consolidation mode around $650-75 before demand picks up towards the end of the quarter,” he said.

Gold for August delivery closed up $2.80 at $666.90 an ounce on the New York Mercantile Exchange today. December gold gained $2.70 to close at $679.30.

Ardent Listener
1st August 2007, 20:09
Someone on another forum mentioned that the spread between the ask and bid price for gold is down to 50 cents. That's low folks.